Intel foresees gradual improvement in business, after last year's slump in sales and profit

SANTA CLARA -- Intel (INTC) reported a big drop in profit for its fourth quarter and last year amid slumping personal computer sales but predicted its business would pick up in a few months.

"I'm excited about the strong pipeline of products we have coming to market," CEO Paul Otellini said during a conference call with analysts, noting that an array of smartphones and tablets containing Intel chips should hit stores later this year. "We see renewed growth" from the introduction of those products, he added.

But some analysts remain skeptical, given Intel's limited success getting its chips into those devices.

"I think they have a shot in this high-stakes game, but they did little in the quarter to prove they were making progress," said Bill Kreher, an analyst with Edward Jones. Looking ahead, "the uncertainty is as great as it has ever been and, by the way, the company is transitioning leadership as well," he added, referring to the 62-year-old Otellini's decision to retire in May. Intel hasn't named his successor.

Declaring a fourth-quarter profit of $2.5 billion -- down 27 percent from the same period a year ago -- the company said it earned 48 cents a share on sales of $13.5 billion, a 3 percent drop from a year ago. But that was better than analysts surveyed by Thomson Reuters had expected. They had predicted 45 cents a share on sales of $13.5 billion.

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For the year, Intel said its profit fell 15 percent from what it had been in 2011 to $11 billion. Its 2012 revenue of $53.3 billion was down about 1 percent from the previous year and just shy of the $53.4 billion analysts had predicted.

The stock market didn't react well to Intel's report. Before announcing its earnings, the company's shares rose 57 cents, or nearly 3 percent, to $22.68 at the market's official close. But in after-hours trading, the shares tumbled 5 percent to $21.53.

Intel, which blamed its financial slump last year on weakened PC sales amid the global economic slowdown, is widely considered a key barometer of the broader tech industry's health. The corporation routinely has turned in stellar earnings since it was founded in 1968. But in recent years, its sales have leveled off as demand for its microchips has weakened and many analysts are worried about its heavy reliance on sales of personal computers.

The company's brainy microprocessors are used in about 80 percent of PCs. But those devices have become less popular, as consumers have shifted to smartphones and tablets. With some analysts estimating that one less personal computer is sold -- or "cannibalized," as experts refer to it -- for every two and a half tablets that are purchased, Intel has been eager to get its chips into mobile devices.

Despite having some successes in that effort, the vast majority of smartphones and tablets use chips made by other companies with an alternative design from British firm ARM Holdings, which traditionally have been more energy efficient and provided longer battery life than Intel's circuits.

Some industry experts are reluctant to dismiss Intel, because of its many years as the world's biggest chipmaker.

"Evidence so far shows that this company can execute," said Sergis Mushell, a principal analyst with the market research firm Gartner. "It's a company that has led the industry."

In a recent note to their clients, J.P. Morgan analysts also predicted the tablet cannibalization of PCs would slow in a few months, which should benefit Intel. Moreover, they said, "there has not been a meaningful PC upgrade cycle since Windows 7 launched in July 2009, and many customers will be forced to upgrade their PCs," triggering more chip sales for Intel.

But in a separate note this week, Raymond James analysts worried that even if Intel can get more of its chips into smartphones, it will need to cut the price of those chips to compete with the relatively inexpensive ARM variety. That would eat into Intel's revenue, they said, adding that Intel faces a similar problem as low-priced ARM chips make headway into computer servers, another market Intel has dominated.

In addition, some analysts complain that Intel hasn't been as innovative as it needs to be.

During the recent Computer Electronics Show, the few Intel-based smartphones the company showed off "generally fell flat with investors," concluded analysts with FBR Capital Markets in a note Wednesday. "If Intel wants to be viewed as a serious competitor in handsets, it needs to launch serious products."

Contact Steve Johnson at sjohnson@mercurynews.com or 408-920-5043. Follow him at Twitter.com/steveatmercnews